By Ian Bremmer
In my World Policy Journal article on the “geopolitics of oil” over the next 25 years, I wrote about the many political pressures that will add upward pressure on crude oil prices over the next several years. But we’re now in the middle of a global financial crisis that has helped drop prices from a high of $147 per barrel in July to under $60 today.
Does the steep price drop remove politics from oil markets? Not at all. Look to recent headlines from three of the countries that have profited mightily from the windfall oil profits of the past few years.
In Iran, President Mahmoud Ahmadinejad and the theocrats who hold real power in the country know that lower crude prices give them plenty to worry about. The International Monetary Fund has warned that when oil prices fall below $90 per barrel, Iran starts to run a budget deficit. When oil falls below $75 per barrel, it can’t afford its import bill. We got a glimpse of the jitters in Tehran in early October, when Iran’s oil minister announced that a price below $100 per barrel was “unacceptable.”
For a government that has ordered gasoline rationing and continues to fight a losing battle against 30 percent inflation, this is a serious problem. Iran’s government has increased spending by nearly 90 percent over the past three years. If that politically popular spending is to continue, where’s the money going to come from if not from energy exports?As profits slow to a trickle, Iran’s leadership will begin to sweat, fearing that its popular legitimacy rests only on a revolution that most Iranians aren’t old enough to remember and on Ahmadinejad’s ability to whip up national pride via fierce defense of the country’s nuclear program.
Unlike the ruling clerics, Ahmadinejad will face angry Iranian voters when elections come around in June 2009. To save his political hide, might he use a fresh round of threatening anti-American and anti-Israeli rhetoric to drive up oil prices and stoke Iranian nationalism? If so, he could create risks for vulnerable and cash-poor energy consumers. He could also push his country into some form of military conflict, intentional or unintentional, with the United States and/or Israel.
Venezuela’s government is vulnerable, as well. High inflation and a shortage of consumer products—the country imports virtually everything except crude oil—will eventually pose challenges for President Hugo Chavez. His government has used the national oil company PDVSA as a piggy bank over the past several years, “bleeding the company of the money it needs to maintain deteriorating infrastructure, to buy new equipment, and to invest in bringing new crude supplies on line,” as I wrote for WPJ. The result is falling oil output, a problem that could become acute as Chavez struggles to maintain his popularity in the years to come.
Both governments have amassed deep financial reserves over the past several years. But for the longer term, both will try to pressure Saudi Arabia to lead OPEC in the output cuts that might again lift prices and save them from their own profligacy.
Lower oil prices aren’t doing any favors for Russia’s government either.
Prime Minister Vladimir Putin and President Dmitri Medvedev remain popular, and the August conflict with Georgia has helped swell national pride. Stabilization funds created from state oil profits have helped the government support a stock market that has lost two-thirds of its value in recent weeks and inject much-needed cash into banks under heavy stress.
But the real story is that Russia’s government is using the financial crisis to strengthen its grip on key economic sectors. The first tranche of state loans to help Russian companies cover their foreign debts has gone out to large, politically well-connected companies that have strategic economic importance. The state now has considerably increased leverage over the future of these companies and the sectors they dominate. Russia is just one more oil producer that needs higher prices to finance this ambitious state agenda. We might even see signs of some limited cooperation between Russian and OPEC to coordinate efforts to push prices higher.
Oil prices will remain cyclical for years to come, and the impact of politics for energy markets (and of energy markets for politics) will continue to matter whether prices rise or fall. That’s the real story behind the geopolitics of oil.
Ian Bremmer, a senior fellow of the World Policy Institute, is the president of Eurasia Group, a political risk consultancy, and the author of The J Curve: A New Way to Understand Why Nations Rise and Fall (Simon & Schuster, 2006). His article, “Oil: A Bumpy Ride Ahead,” can be found in World Policy Journal’s 25th anniversary issue, on newsstands now.